A recent Internal Revenue Service Office of Chief Counsel memorandum (CCA 201725026) provides guidance on whether the IRS can charge interest on court ordered restitution payments related to Title 18 criminal tax cases. As background, typically when a court orders restitution in a criminal tax case, it is often for an amount equal to the taxes not paid by the defendant due to their conduct. Before Congressional FETI ACT of 2010, the restitution was not viewed as a “tax” under the income tax rules. This act changed that.
The three main issues addressed in this memorandum are:
- Whether the court-ordered restitution incurs interest under Title 26 (Internal Revenue Code)
- When does the interest begin to accrue on the obligation
- Whether the assessment of interest is barred by the prohibition on over compensation of the government
Under IRC section 6201(a)(4), the IRS shall assess and collect the amount of restitution under an order pursuant to Title 18, section 3663A. Therefore, if restitution is ordered by the court to compensate the IRS as a victim for the failure to pay taxes imposed by Title 26, then the restitution will be viewed as a tax, and be subject to the interest rules when the tax is not paid when it was due.
Under IRC section 6601(a), it provides that if any amount of tax imposed by Title 26 is not paid on or before the last day prescribed for payment, interest on such amount at the current under payment rate established under IRC section 6621 shall be paid for the period from such date incurred to such date paid. As an example, if the restitution amount related to unpaid taxes for the 2014 tax year the taxes were originally owed and due April 15, 2015. The interest would be charged from April 15, 2015 until it is paid. In the recent past (the last 5 years or so), that interest rate has hovered around 4-5% per year. Of note, the IRS ignores other code sections that would impose a separate penalty for not paying the “taxes” owed on time. That rate is typically one-half of one percent per month. Since the restitution is related to the computed tax loss suffered by the IRS, and the restitution is not a penalty in itself, it is a bit perplexing why the IRS would not charge a failure to pay penalty in addition to the interest charge they normally do in civil underpayment case, if the restitution amount is now a “tax”.
In conclusion, in the situation where a US Federal Court sentences a defendant to pay restitution upon conviction of certain criminal tax cases, the IRS can separately charge interest on the underlying tax that relates to the restitution award. Whether the tax assessment is barred by the prohibition on over-compensating the government depends on the facts of each case. When a plea agreement is entered into, the defendant needs to determine the amount he or she is willing to spend to settle the matter. Knowing that interest is being charged by the IRS in these cases, the defendant should factor that amount into account the interest charge when determining the restitution amount they are willing to pay. Therefore, it is unlikely that a court would find an over compensation issue in these cases.